APPLICATIONS OF VALUE MULTIPLES
Now that wehaveidentified thevariables that affect each
multipleandhaveasenseofhowchangesinthesevariables
can affect enterprise value multiples, we can turn our
attentiontousingthesemultiplesinrelativevaluation.Inthis
section,webegin,aswedidtheequitymultipleapplication
section, by looking at comparisons of companies within
individual sectors and then look at marketwide comparisons.
Sector Comparison
Aswithequitymultiples,enterprisevaluemultiplesareused
byanalyststocomparefirmswithinasector.Evenmoreso
than with equity multiples, little is done to control for
differences across firms in sample.Thus, while an analyst
comparingP/Eratiosacrosssoftwarecompanieswillatleast
considerdifferences in growthrates across thecompanies,
analystsoftenjustcomparetheenterprisevalue-to-EBITDA
multiples across cable or telecom companies, with no
consideration given to fundamental differences across the
companies. In this section, we look at three illustrations,
whichpresentthreewaysofcontrollingfordifferencesacross
companies, paralleling the approaches used with equity
multiples.
Subjective Judgments
Thisisthesimplestextensionofthenaiveapproach,where
after comparing the values of enterprise value multiples
acrosscompanies,weatleastpauseandconsiderthevariables
thatweknowaffectthosemultiplestoseeiftheyexplainthe
differences.Thus,wewouldexaminethereturnoncapitalfor